Oil prices fell about 2 per cent to a six-week low on Tuesday on rising expectations of a ceasefire in Gaza and growing concerns about demand in China.
Brent futures fell $1.39, or 1.7 per cent, to settle at $81.01 a barrel, while U.S. West Texas Intermediate crude (WTI) closed $1.44, or 1.8 per cent, lower at $76.96.
That was the lowest closes for Brent and WTI since June 7 and pushed both benchmarks into technically oversold territory for the first time since early June.
U.S. diesel futures also settled at their lowest since June 7, while gasoline futures closed at their lowest since June 14.
In the Middle East, efforts to reach a ceasefire deal between Israel and militant group Hamas under a plan outlined by U.S. President Joe Biden in May and mediated by Egypt and Qatar, have gained momentum over the past month.
Israeli Prime Minister Benjamin Netanyahu told families of hostages held in Gaza that a deal to secure their release could be near even as fighting raged in the Palestinian enclave.
Biden is expected to meet Netanyahu on Thursday at the White House.
The war in Gaza has lent support to oil futures as investors priced in the risk of potential disruptions to global crude supply in the key producing regions of the Middle East.
United Nations Special Envoy to Yemen Hans Grundberg warned of a real danger of a devastating regional escalation following new Iran-backed Houthi attacks on commercial shipping and the first Israeli air strikes on Yemen in retaliation for Houthi drone and missile attacks on Israel.
Palestinian factions including rivals Hamas and Fatah, meanwhile, agreed to end their divisions and form an interim national unity government during negotiations in China.
“Ceasefire negotiations in the Middle East and an uncertain macroeconomic outlook in China are exerting downward pressure on oil prices this week,” Claudio Galimberti, global market analysis director at Rystad said in a note.
Also weighing on prices, the U.S. dollar strengthened to a nine-day high against a basket of other currencies.
A stronger greenback makes oil more expensive in other countries, which can reduce demand for the fuel.
Growing bets on interest rate cuts in September, however, could provide a floor to oil prices, as lower borrowing costs tend to support oil demand.
European Central Bank Vice-President Luis de Guindos hinted at a possible interest rate cut in September, while in the U.S., investors are betting the Federal Reserve will cut interest rates in September.
The Fed hiked rates aggressively in 2022 and 2023 to tame a surge in inflation. Higher interest rates increase borrowing costs for consumers and businesses, which can reduce economic growth and demand for oil.
China surprised markets by cutting major short and long-term interest rates on Monday, its first such broad move since last August, signalling intent to boost growth in the world’s second-largest economy.
The market is looking for direction from weekly U.S. oil storage data from the American Petroleum Institute (API) trade group later on Tuesday and the U.S. Energy Information Administration (EIA) on Wednesday.
Analysts projected U.S. energy firms pulled about 1.6 million barrels of crude out of storage during the week ended July 19.
If correct, that would be the first time U.S. crude stocks declined for four weeks in a row since September 2023 and compares with a decrease of 600,000 barrels in the same week last year and an average decline of 1.8 million barrels over the past five years (2019-2023).